Indicators of Absorptive Capacity and Import‐induced South–North Convergence in Labour Intensities

• Author: Michael Hübler,Peter Nunnenkamp,Alexander Glas
• Date: 01 November 2016
• Published date: 01 November 2016
• DOI: http://doi.org/10.1111/twec.12300

Indicators of Absorptive Capacity and

Import-induced South–North Convergence

in Labour Intensities

Michael H€

ubler

1

, Alexander Glas

2

and Peter Nunnenkamp

3

1

Centre for European Economic Research (ZEW), Mannheim, Germany and Leibniz Universität

Hannover, Hannover, Germany,

2

Department of Economics, University of Heidelberg, Heidelberg,

Germany, and

3

Kiel Institute for the World Economy, Kiel, Germany

1. INTRODUCTION

International technology transfer and diffusion are often seen as key for promoting economic

growth and development. Firms in industrialised countries engage in R&D (research and

development) resulting in advanced knowledge and technologies. These technologies can be

transferred to developing and emerging countries, particularly embodied in investment goods

that enter the productive capital stock. Firms in developing countries learn how to use, replicate

and further develop these technologies. This implies technology diffusion from industrialised

source countries in the North to less advanced recipient countries in the South.

However, to benefit from international technology transfer, firms in the South must possess

sufficient absorptive capacity. Their capacity to make use of superior imported technology

may be fundamentally constrained by deep-seated impediments related to hostile geographical

conditions and post-colonial legacies (notably in terms of deficient institutions).

1

At a more

policy-related level, such deep-seated forces tend to be reflected in various indicators of local

absorptive capacity. Our focus is on identifying policy-relevant indicators of absorptive capac-

ity and assessing their role in enhancing South–North convergence through the channel of

imported investment goods.

2

While our approach resembles Abramovitz’s (1986) perspective of South–North conver-

gence in productivity levels and the role of social capability as a prerequisite for absorbing

foreign knowledge, we consider a broad variety of measurable aspects of absorptive capacity.

The spectrum covers education and skills which enable people to understand, use and develop

imported technology; the development of local infrastructure, notably access to information

and communication technologies (ICT) facilities required to diffuse information and knowl-

edge; and local innovation as reflected in patents, trademarks and scientific publications which

We gratefully acknowledge financial support by the state of Baden-Wu

¨rttemberg within the programme

Strengthening Efficiency and Competitiveness in the European Knowledge Economies (SEEK). We are

very grateful to Susanne Becker and Simon Koesler for their excellent research support. We thank

Rebecca Hartje, Florens Flues, Sourafel Girma, Carolyn Fischer, Michael Schymura, Andreas Lo

¨schel,

Taran Faen, Ebru Voyvoda and participants of research seminars at the Centre for European Economic

Research in Mannheim and at the Universities of Hanover and Go

¨ttingen and participants of the SEEK

project workshop in Dublin for very helpful comments.

1

For a more detailed discussion of fundamental reasons for Africa’s persistent poverty see, for example,

Sachs and Warner (1997) and Acemoglu and Robinson (2010); see also Section 2 below.

2

We attempt to control as far as possible for more fundamental and slow-moving determinants of

absorptive capacity, as we explain in Section 3.

©2015 John Wiley & Sons Ltd

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The World Economy (2016)

doi: 10.1111/twec.12300

The World Economy

are supposed to provide important complements to imported investment goods. More closely

related to the fundamental role of institutions (Acemoglu et al., 2002), we also consider

indicators of economic and political freedom. Protection of property rights, for instance, can

secure and spur people’s market activities, including international technology transfers.

Another set of indicators captures the local availability of services and high-tech industrial

inputs. Both sectors are not only supposed to utilise advanced technologies, but also to play

an important role in the diffusion of imported technology.

The broad coverage of different aspects of absorptive capacity that can be shaped by policy

interventions represents our major contribution to the literature. Moreover, we assess the inter-

relations between various indicators through principal component analysis (PCA). In contrast,

previous studies have typically taken a narrower perspective on absorptive capacity –often by

focusing exclusively on education and human capital.

3

In addition, we make use of the com-

prehensive and new data set WIOD (World Input–Output Database, cf. Dietzenbacher et al.,

2013) that provides bilateral and bisectoral trade data for 39 countries, including eight emerg-

ing economies, and 35 sectors for the period 1995–2009. This enables us to account for the

interaction of our indicators of absorptive capacity with imports of investment goods.

Emerging economies are of major interest in the present context of assessing the impact of

different aspects of absorptive capacity on the South–North convergence of labour intensities.

These economies are typically well integrated into the world economy, and they appear to be

less constrained by deep-rooted geographical and institutional factors than countries trapped

in absolute poverty. Our sample of eight emerging economies –Brazil, Bulgaria, China, India,

Indonesia, Mexico, Romania and Russia –thus allows us to address several policy-relevant

questions: which indicators of absorptive capacity are associated with South–North conver-

gence in labour intensities? How are these indicators interrelated? Are specific indicators par-

ticularly important by enhancing the absorption of foreign technology through imports of

investment goods?

Our empirical findings could help policymakers design policies that support international

technology diffusion, boost productivity and strengthen economic development. PCA suggests

that our indicators of absorptive capacity are interrelated. Nevertheless, we gain additional

insights from considering specific indicators and their interaction with imports of investment

goods. Most surprisingly perhaps, the effect of education on South–North convergence does

not appear to work through the channel of imported investment goods. By contrast, several

indicators of economic and political freedom, availability of services, local skills and ICT

facilities interact significantly with imported investment goods so that they enhance conver-

gence in this way, although all estimated interaction effects have small magnitudes.

The paper proceeds as follows: Section 2 positions our paper in the literature. Section 3

sets up the econometric model and discusses endogeneity concerns. Section 4 describes the

data. Section 5 presents the regression results with principal components as well as specific

indicators as explanatory variables for South–North convergence, while Section 6 offers

robustness checks. Section 7 summarises and concludes with a policy thought experiment

drawing upon the estimated results.

3

Recent studies looking at selected institutional and social factors and, in several cases, at foreign direct

investment include the following: Crespo-Cuaresma et al. (2008), Fagerberg and Srholec (2008), Coe

et al. (2009), Kemeny (2010) and Perkins and Neumayer (2012); for more details, see Section 2.

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2. LITERATURE

Our analysis is positioned in the wide middle ground between the literature on fundamental

reasons for persistent gaps in South–North productivity and a number of studies focusing on

one particular country characteristic, typically it is people’s educational achievement and the

related endowment of human capital, in fostering technology spillovers through trade and

foreign direct investment (FDI).

As concerns fundamental reasons for persistent poverty in the South and large productivity

gaps to the North, an influential strand of the literature stresses the primacy of institutions

(e.g. Acemoglu et al., 2001; Rodrik et al., 2004).

4

This view holds that major institutional

deficiencies are often rooted in colonial legacies. By entrenching a small group of ruling

elites, institutional deficiencies tend to persist so that they continue to impede economic con-

vergence and technological upgrading through trade and FDI. While the role of good institu-

tions for successful catching up is hardly disputed, another line of reasoning maintains that

measures of geography such as disease ecology (particularly the prevalence of malaria) can

directly affect long-term economic development, in addition to the effects of the institutional

framework (e.g. Sachs and Malaney, 2002; Sachs, 2003). While our subsequent analysis does

not address this debate on the fundamental reasons of persistent South–North productivity

gaps, both camps would probably agree that the indicators of absorptive capacity introduced

below are policy-relevant proxies revealing the chances of countries to narrow such gaps.

Our paper closely relates to the literature that estimates international technology spillovers

via trade and FDI and assesses the impact of education and human capital as conditioning fac-

tors of such spillovers. This literature reports mixed results for the productivity effects of

international technology spillovers on recipient countries via trade and FDI (for overviews see

Saggi, 2002; Keller, 2004; Hoekman and Javorcik, 2006). The argument that educational

attainment (human capital) and a larger distance to the technology frontier enhance interna-

tional technology diffusion can be traced back to Nelson and Phelps (1966).

5

Findlay (1978)

adds FDI as the transmitter of productivity gains to this framework. Keller (1996) integrates

the essential role of human capital for international knowledge dissemination into a theoretical

framework with horizontal product differentiation. He argues that human capital must grow

after opening up an economy to international trade in order to sustain economic growth.

While we extend the scope of absorptive capacity beyond education and skills, the important

message of the theoretical literature for our empirical analysis is that importing alone does

not suffice for absorbing knowledge.

Indeed, several empirical studies identify a positive impact of education and human capital

on productivity growth (e.g. Eaton and Kortum, 1996; Griffith et al., 2004; Benhabib and

Spiegel, 2005).

6

While this strand of the literature mostly explores the direct effect of human

capital on growth, the empirical study by Falvey et al. (2007) considers imports of machinery

and transport equipment as the transmission channel of productivity spillovers, together with

4

For a detailed review of the relevant literature, see Carstensen and Gundlach (2006).

5

Inspired by the classic theory, a number of econometric studies pay attention to the distance to the

technology frontier (e.g. Griffith et al., 2004, and Benhabib and Spiegel, 2005, for disembodied technol-

ogy spillovers; Girma, 2005, for FDI-related spillovers at the industry level; Kneller, 2005). The results

of these studies are, however, ambiguous on whether technology diffusion increases or decreases in the

distance to the technology frontier.

6

This result is, however, not undisputed. Pritchett (2001), for example, finds that human capital growth

reduces productivity.

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UBLER, A. GLAS AND P. NUNNENKAMP